Melville v Inland Revenue Commisioners
| Jurisdiction | England & Wales |
| Judgment Date | 20 June 2000 |
| Date | 20 June 2000 |
| Court | Chancery Division |
Chancery Division.
Lightman J.
Edward Nugee QC (instructed by Salans Hertzfeld & Heilbron) for the appellants.
Michael Furness QC (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgment:
A-G v Farrell ELR[1931] 1 KB 81
A-G v Heywood ELR(1887) 19 QBD 326
Gilchrist, Ex parte; Re Armstrong ELR(1886) 17 QBD 521
Coote, Ex parte (1949) 66 WN (NSW) 28
Gartside v IR Commrs ELR[1968] AC 553
Kearns v Cordwainer's Company (1859) 28 LJCP 285
Nokes v Doncaster Amalgamated Collieries Ltd ELR[1940] AC 1014
Stratton's Disclaimer, Re ELRELR[1957] Ch 132; [1958] Ch 42 (CA)
Tremayne v Rashleigh ELR[1908] 1 Ch 681
Inheritance tax - Settlement - General power of appointment - Assets settled on trust subject to a right in the settlor after 90 days of the date of the settlement to revest the assets in himself - Whether the settlor's right was "property" reducing the admitted liability to inheritance to a negligible amount - Inheritance Tax Act 1984Inheritance Tax Act 1984, ss. 3(1), 272.
This was an appeal by the settlor and trustees of a settlement ("the taxpayers") against determinations to inheritance tax made on the footing that the settlor's right to vest the settled property in himself did not constitute "property" within the meaning of Inheritance Tax Act 1984 section 272s. 272 of the Inheritance Tax Act 1984 and consequently did not affect the liability to inheritance tax under Inheritance Tax Act 1984 section 3 subsec-or-para (1)s. 3(1) on the transfer of assets into the settlement.
By a settlement dated 3 March 1994 and on two later occasions, property was transferred to a settlement on conventional trusts for the benefit of the settlor's family. Discretionary trusts of income and power to appoint capital were conferred on the trustees until the vesting day (80 years from the date of the settlement).
A general power of appointment was conferred on the settlor, exercisable during his life after 90 days from the date of the settlement. For the avoidance of doubt it was stated that the settlor "shall have power to direct the trustees to transfer the whole of the trust fund to the settlor absolutely".
The issue was whether, for the purposes of Inheritance Tax Act 1984s. 3(1) of the 1984 Act, in comparing the value of the settlor's estate before and after the transfers into settlement, the rights were to be treated as "property". If so, it was common ground that the value of the right approximated to the value of the assets transferred to the settlement, since, so long as the settlor survived for 90 days, he could at any time have recovered them and a small discount would be sufficient to cover the risk that he might not survive such a short period.
It was also common ground that the transfers were not potentially exempt transfers within Inheritance Tax Act 1984 section 3As. 3A of the 1984 Act; that the provisions relating to gifts with reservation did not apply; that the "reverter to settlor" exemption inInheritance Tax Act 1984 section 53s. 53 would not apply if the trustees transferred property to the settlor; and that, since the transfer into settlement attracted inheritance tax,Taxation of Chargeable Gains Act 1992 section 260 subsec-or-para (2)s. 260(2) of the Taxation of Chargeable Gains Act 1992 would apply, ensuring that liability for two taxes on the same transaction would be avoided.
The Revenue contended that normally the value of a trust fund was quite unaffected by the existence of a general power of appointment which, if exercised would terminate the beneficiary's interest. But the Revenue relied on two aspects of the statutory scheme as indicative of the legislative intention that a general power of appointment should not be treated as "property" for the purposes of Inheritance Tax Act 1984 section 3 subsec-or-para (1)s. 3(1): i.e. the fact that powers of appointment were relevant where an interest in possession in a settlement terminated and the fact that reversionary interests were designated as "excluded property" (Inheritance Tax Act 1984 section 48s. 48).
Held, allowing the trustees' appeal:
1. The statutory definition of "property" in Inheritance Tax Act 1984 section 272s. 272 of the 1984 Act required a two-stage exercise to determine whether a particular right constituted "property" within the meaning of Inheritance Tax Act 1984 section 3 subsec-or-para (1)s. 3(1). The first exercise was to establish whether the right was prima facie "property". The second exercise was to decide whether "the context otherwise requires". Only if the context did so require could the prima facie meaning be excluded and the right held not to be property.
2. The first stage of the exercise led to the conclusion that prima facie the settlor's right to revest the fund in himself constituted part of the property of the settlor for the purpose of Inheritance Tax Act 1984 section 3 subsec-or-para (1)s. 3(1) of the 1984 Act. The words "of any description" given to "right" and "interest" byInheritance Tax Act 1984 section 272s. 272 had the broadest meaning. The right to revest constituted a form of proprietary right or interest which the settlor could at any time realise either by selling a release or (after 90 days) by exercising it in his own favour.
3. Accordingly, the Revenue had to establish at the second stage (in the language of Inheritance Tax Act 1984 section 272s. 272) that "the context otherwise required". Looking atInheritance Tax Act 1984 section 3 subsec-or-para (1)s. 3(1) in the context of the Act as a whole, it could not be said that the context required that the statutory definition should not apply in the case of Inheritance Tax Act 1984 section 3 subsec-or-para (1)s. 3(1). It followed that the right to revest in this case fell within the definition of "property" within Inheritance Tax Act 1984 section 272 section 3 subsec-or-para (1)ss. 272 and 3(1).
Lightman J: Introduction:
1. The second and third appellants ("the trustees") are the trustees of a settlement ("the settlement") dated 3 December 1993 and made between the first appellant ("the settlor") and the trustees. The appeals are against determinations ("the determinations") dated the 5 August 1999 made by the respondents ("the Revenue"). The issue raised is whether, in determining the amount of the value transferred by gifts made by the settlor into the settlement, his right ("the Right") to require the trustees (or their successors) to revest all or part of the property comprised in the settlement in him at any time during his life after the expiration of 90 days from the date of the settlement is to be treated for the purposes of Inheritance Tax Act 1984 section 3 subsec-or-para (1)s. 3(1) of the Inheritance Tax Act1984 ("the 1984 Act") as part of the "rights and interests of any description" which formed part of his estate immediately after the settlement. The Revenue determined that the answer was in the negative and that the Right is to be left out of account. The settlor and the trustees on this appeal challenge the correctness of the determinations. The issue is a question of principle of potentially wide application and indeed this is (in effect) a test case for a number of like drawn settlements.
2. The settlement is in most respects a common form discretionary settlement. The most significant departure is the conferment of the Right on the settlor.
(a) Clause 1 defines "the Trust Fund" as an initial sum of £10 and all additions to the trust fund; "the vesting day" as the day on which expires the period of 80 years from the date of the settlement; "the Appointed Class" as consisting of the settlor, his wife or widow, his children and remoter issue and their spouses and relicts, and any person who may be added to the appointed class by the trustees before the vesting day; "the Accumulation Period" as the period of 21 years from the date of the settlement; and "the Relevant Day" as the day on which expires the period of 90 days from the date of the settlement (i.e. 3 March 1994);
(b) Clause 3 contains a conventional discretionary trust of income until the vesting day, subject to a power for the trustees to accumulate income during the accumulation period;
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(c) Clause 4(a) confers power on the trustees in a conventional form until the vesting day
(i) to appoint new trusts of capital for the benefit of all or any of the appointed class;
(ii) to transfer all or any part of the trust fund to all or any of the appointed class;
(iii) to transfer all or any part of the trust fund to the trustees of any other settlement the beneficiaries of which shall be or include all or any of the appointed class;
(d) Clause 4(b) provides that the powers conferred on the trustee by cl. 4(a) shall not be exercisable during the lifetime of the settlor without his consent or after his death without the consent of at least two adult members of the appointed class;
(e) Clause 4(c) confers on the settlor the Right, namely the general power exercisable during his lifetime at any time or times after the relevant day and before the vesting day by deed or deeds to direct the trustees to exercise any one or more of the powers conferred by cl. 4(a) in such manner as shall be specified in such deed; and it declares that the trustees shall forthwith exercise such power or powers accordingly, and that (for the avoidance of doubt) the settlor shall have power to direct the trustees to transfer the whole of the trust fund to the settlor absolutely and to join with the settlor in making a claim to the Inland Revenue for hold-over relief from capital gains tax pursuant to section 260s. 260 of the Taxation of Capital Gains Act 1992.
(f) Clause 5 contains an ultimate trust for the settlor's daughter absolutely;
(g) Clause 8 declares the trusts irrevocable.
3. On 22 February 1994 the settlor paid £6,000 to the trustees to hold on the trusts of...
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